Beige Book Report: Chicago
January 14, 2015
Growth in economic activity in the Seventh District remained moderate in December, and contacts expected growth to continue at a similar pace in 2015. Consumer spending, business spending, and manufacturing production all increased moderately, while construction and real estate activity increased modestly. Credit conditions were little changed on balance. Prices were also little changed with the exception of energy and some agricultural commodities.
Consumer Spending
Growth in consumer spending remained moderate in December. Overall, holiday sales slightly exceeded expectations as consumers benefitted from generous promotions, advantageous weather conditions, and lower gasoline prices. Growth was robust for apparel, footwear, hobby items, specialty gifts, sporting goods, and toys, but was slower for the food and beverage sectors. Light vehicle sales increased steadily in recent weeks. Auto dealers reported that accommodative financing terms continued to spur sales and that lower gas prices were leading consumers to shift purchases toward trucks and SUVs and away from cars. In general, retailers expect sales growth to remain moderate in 2015, supported by the improving job market and the prospect of continued lower energy prices.
Business Spending
Business spending also continued to grow at a moderate pace in December. Most retailers reported comfortable inventory levels, though some noted that stocks of winter-related items were slightly elevated because of the mild weather in the early winter. Inventories also were at comfortable levels for most manufacturers, though one contact noted that inventories of farm tractors were elevated, leading agricultural equipment manufacturers to offer special financing and extended warranty programs to lure buyers. Capital expenditures and spending plans continued to rise. Outlays were aimed primarily at replacing industrial and IT equipment, though many contacts also reported spending for capacity expansion. Hiring increased and contacts expected job growth to continue in the coming year. There was ongoing strong demand for skilled workers, particularly for those in professional and technical occupations and skilled manufacturing and building trades. In addition, a staffing firm reported an increase in demand for its services from small- and medium-sized businesses.
Construction and Real Estate
Construction and real estate activity increased modestly in December. Demand for residential construction was little changed in both the single- and multi-family markets. Although homebuilders were optimistic about the overall economy, many were concerned that the housing sector would continue to lag in 2015. Home prices and residential rents both increased, while the pace of home sales slowed. Real estate contacts forecasted flat or modest growth in home sales in 2015. Nonresidential construction increased, driven in large part by demand for industrial and office buildings. Commercial real estate activity expanded broadly--vacancies ticked down, rents rose, and leasing of industrial buildings, office space, and retail space all increased.
Manufacturing
Manufacturing continued to grow at a moderate pace in December. Activity in the auto, aerospace, and energy industries remained a source of strength for the District. Demand for inputs for oil and gas production remained strong, boosted by projects begun before the fall in oil prices. An energy industry contact noted that given the typical lag between prices and production, activity should begin to slow in the second quarter of 2015. Demand for steel rose steadily, with expectations for continued growth in 2015. Most specialty metals manufacturers reported steady gains in orders and solid order books, and some contacts indicated a surprisingly high level of activity during the typically slow holiday season. In contrast, demand for heavy machinery grew slowly, though there were marked differences across product categories: Sales of construction machinery continued to grow at a moderate rate, while sales of agricultural and mining equipment remained weak.
Banking and Finance
Credit conditions were little changed on balance in December. Financial market volatility stabilized after spiking during the prior reporting period, while equity markets moved higher. Business loan demand was steady, and credit line utilization remained elevated for middle market firms. Banking contacts noted the fall in oil prices as a source of medium-term uncertainty for business lending, with downside risk to loan quality for firms in the oil supply chain. Demand for auto loans increased in line with expectations, and a contact noted a significant spike in credit card applications. In general, banking contacts viewed current conditions as favorable for continued growth in business and consumer lending in 2015.
Prices and Costs
With the exception of falling energy prices, cost pressures were little changed in December. Most contacts reported no change in prices, while retailers noted some downward price pressure. Of the few contacts reporting price increases, most cited rising labor costs as a driver. Many contacts noted that skilled labor was in short supply, and wage pressures continued for such workers. Wage pressures remained less pronounced for unskilled workers, but a staffing firm noted that it was working with clients to raise contract wages in an effort to reduce labor force turnover. Non-wage costs changed little on balance, though a number of contacts again reported rising healthcare costs.
Agriculture
Corn and wheat prices rose during the reporting period, while soybean prices were flat. Wheat prices were up because of drought and cold snaps in areas producing winter wheat and because of limits by the Russian government on exports. The record harvest had created concerns about sufficient crop storage space, but reports indicated that enough space was available. Shipping delays eased too, allowing stocks to move more smoothly to end users. The late extension of beneficial tax deductions will give a boost to after-tax agricultural income in 2014. Low crop prices led farmers to focus on minimizing costs instead of maximizing output in 2015, so that they purchased fewer and lower cost inputs. In addition, rental terms for some cropland were under pressure because farmers would not make enough to cover their costs next year. Ethanol margins compressed with the drop in oil prices. Hog and milk output was higher than expected, leading to further price decreases. Cattle prices were little changed, but became more volatile.